The Pre-Commitment Approach in a Model of Regulatory Banking Capital

FRB Richmond Economic Quarterly, Vol. 83, No. 1, Winter 1997, pp. 23-50

28 Pages Posted: 19 Nov 2012

See all articles by Edward S. Prescott

Edward S. Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: 1997

Abstract

The pre-commitment approach offers a novel way to improve bank capital regulation. It requires that banks choose their capital levels and that regulators fine them if losses exceed this level. In essence, the approach is a proposal to use menus of contracts, a device commonly employed in other economic settings. Using a private-information model, the author derives optimal fine schedules and compares them to the proposal's schedules. He shows the latter schedules to be inefficient and potentially to require high levels of fines.

Suggested Citation

Prescott, Edward (Ned) Simpson, The Pre-Commitment Approach in a Model of Regulatory Banking Capital (1997). FRB Richmond Economic Quarterly, Vol. 83, No. 1, Winter 1997, pp. 23-50. Available at SSRN: https://ssrn.com/abstract=2129864

Edward (Ned) Simpson Prescott (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States

HOME PAGE: http://https://www.clevelandfed.org/people-search?pid=f8ca941e-4b51-41f6-95f8-c87f1d3806e5

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